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Taxation and Excess Burden: A Life-Cycle Perspective

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  • E. John Driffill
  • Harvey S. Rosen

Abstract

A lifetime perspective is appropriate in assessing the welfare implications of government tax policies. Although a number of attempts have been made to ex- amine the excess burden of taxation in life-cycle models, these have tended to ignore the role of human capital accumulation and/or the leisure-income choice. In this paper, we do numerical simulations with a model that takes both of these phenomena into account. We find that under reasonable assumptions, the failure to take into account distortions of human capital decisions produces substantial underestimates of the excess burden of income taxation. In addition, allowing for the endogeneity of human capital increases the efficiency of a personal consumption tax relative to that of an equal yield income tax.

Suggested Citation

  • E. John Driffill & Harvey S. Rosen, 1981. "Taxation and Excess Burden: A Life-Cycle Perspective," NBER Working Papers 0698, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0698
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    Cited by:

    1. Cruz Echevarria & Amaia Iza, 2000. "Income Taxation and Finite Horizons in a Human Capital Model," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 7(6), pages 665-689, December.
    2. Annette Alstadsæter & Ann-Sofie Kolm & Birthe Larsen, 2005. "Tax Effects, Search Unemployment, and the Choice of Educational Type," CESifo Working Paper Series 1622, CESifo.
    3. Berthold U. Wigger, 2004. "On the Intergenerational Incidence of Wage and Consumption Taxes," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(1), pages 1-23, February.
    4. Nielsen, Soren Bo & Sorensen, Peter Birch, 1997. "On the optimality of the Nordic system of dual income taxation," Journal of Public Economics, Elsevier, vol. 63(3), pages 311-329, February.
    5. Rosen, Harvey S, 1982. "Taxation and On-the-Job Training Decisions," The Review of Economics and Statistics, MIT Press, vol. 64(3), pages 442-449, August.
    6. Elmendorf, Douglas W & Kimball, Miles S, 2000. "Taxation of Labor Income and the Demand for Risky Assets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(3), pages 801-833, August.
    7. Poterba, James M, 1989. "Lifetime Incidence and the Distributional Burden of Excise Taxes," American Economic Review, American Economic Association, vol. 79(2), pages 325-330, May.
    8. Mr. John J Matovu & Ms. Era Dabla-Norris, 2002. "Composition of Government Expenditures and Demand for Education in Developing Countries," IMF Working Papers 2002/078, International Monetary Fund.
    9. Lance Lochner & Alexander Monge-Naranjo, 2002. "Human Capital Formation with Endogenous Credit Constraints," NBER Working Papers 8815, National Bureau of Economic Research, Inc.
    10. Alstadsæter, Annette & Kolm, Anne-Sofie & Larsen, Birthe, 2005. "Money or Joy," Working Papers 23-2005, Copenhagen Business School, Department of Economics.
    11. Lans Bovenberg, A. & Jacobs, Bas, 2005. "Redistribution and education subsidies are Siamese twins," Journal of Public Economics, Elsevier, vol. 89(11-12), pages 2005-2035, December.
    12. Annette Alstadsæter & Ann-Sofie Kolm & Birthe Larsen, 2005. "Tax Effects on Unemployment and the Choice of Educational Type," Discussion Papers 419, Statistics Norway, Research Department.
    13. Alstadsí¦ter, Annette & Kolm, Ann-Sofie & Larsen, Birthe, 2008. "Money or joy: The choice of educational type," European Journal of Political Economy, Elsevier, vol. 24(1), pages 107-122, March.
    14. George R. Zodrow, 2019. "Should Capital Income Be Subject to Consumption-Based Taxation?," World Scientific Book Chapters, in: George R Zodrow (ed.), TAXATION IN THEORY AND PRACTICE Selected Essays of George R. Zodrow, chapter 5, pages 131-168, World Scientific Publishing Co. Pte. Ltd..
    15. Philip A. Trostel, 1996. "Should Education Be Subsidized?," Public Finance Review, , vol. 24(1), pages 3-24, January.
    16. Lin, Shuanglin, 1999. "Tax reform and external balance," Journal of International Money and Finance, Elsevier, vol. 18(6), pages 891-909, December.
    17. Zodrow, George R. & Diamond, John W., 2013. "Dynamic Overlapping Generations Computable General Equilibrium Models and the Analysis of Tax Policy: The Diamond–Zodrow Model," Handbook of Computable General Equilibrium Modeling, in: Peter B. Dixon & Dale Jorgenson (ed.), Handbook of Computable General Equilibrium Modeling, edition 1, volume 1, chapter 0, pages 743-813, Elsevier.
    18. Geir Haakon Bjertnæs, 2001. "Optimal Combinations of Income Tax and Subsidies for Education," Discussion Papers 313, Statistics Norway, Research Department.
    19. Era Dabla-Norris & John M. Matoovu & Paul Wade, 2002. "Debt Relief, Demand for Education, and Poverty," WIDER Working Paper Series DP2002-52, World Institute for Development Economic Research (UNU-WIDER).
    20. McGrattan, Ellen R., 1994. "The macroeconomic effects of distortionary taxation," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 573-601, June.
    21. Shuanglin Lin, 1998. "Taxing Consumption in an Open Economy," Public Finance Review, , vol. 26(3), pages 250-269, May.
    22. Chaitali Sinha, 2014. "Human Capital and Public Policy," South Asian Journal of Macroeconomics and Public Finance, , vol. 3(1), pages 79-125, June.
    23. Hisham S. El‐Osta, 2010. "Inequality decomposition of farm family living expenditures and the role of the life cycle," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 70(2), pages 245-266, August.

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